Alarm bells are ringing in the pensions industry over fears that people are accessing cash too early and too quickly.
Research from the Financial Conduct Authority found almost three-quarters of pots accessed in the past two years were from savers under 65.
And more than half of all those who took money emptied their pots entirely.
Andrew Tulley, pensions technical director at advisers Retirement Advantage, said: “This research is backed up by the Government’s own stats on the additional tax take, which by their own admission is way higher than they expected.”
But he warned the rush to plunder pots in some cases was madness. “Moving money from a tax-efficient pensions environment to place into other savings or investments is frankly bonkers.”
The whole idea of the pension freedoms – launched just over two years ago to give more flexible access to savings for over 55s – was to put people in control of their cash.
But people find pensions simply too complex and more choice has led to even more confusion with people rushing into decisions without any idea of the consequences to their long term finances.
It’s a clear sign the new system may not be working as well as it should for savers.
The six steps
1. Work out what income you are likely to receive at the point you plan to retire
First step is to ask for a state pension forecast. With the introduction of a flat rate state pension in April 2016, you need to know how much you are likely to receive.
This will form the bedrock of your retirement income. Visit: gov.uk/check-state-pension or call the Future Pension Centre on 0345 3000 168.
Check if you have any other sources of income likely to boost your state pension, for example a workplace pension scheme.
Make sure you have remembered or accounted for any old pension schemes. You can check for missing pensions for free using the Government pension tracing service at gov.uk/find-pension-contact-details or call 0345 6002 537.
Do you know what your pension is worth?
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2. Make a budget of your likely expenditure in retirement
Be honest, account for everything. So council tax, food, heating bills, going out, car insurance. And remember the less obvious costs, gym membership, pet insurance, or that magazine subscription.
You may find your income is not sufficient to cover your expenditure. Don’t panic. This is the time to review your needs in retirement and see where you might be flexible.
For example, do you really need the gym membership? Or could you consider working longer?
3. Ask your pension provider for a statement so you can see what your pension is worth and what income it is likely to generate
Check if you have any valuable guarantees attached to your pension, for example guaranteed annuity rates.
You don’t have to use the pension or annuity on offer from your existing company.
Always shop around for your retirement income, as you can boost your income by as much as 30% by simply comparing rates across the whole market.
You can also save hundreds of pounds in fees by shopping around if you are considering using drawdown.
4. Think about how long you expect your income/pension to last in retirement
How much of this is guaranteed, for example the state pension, defined benefit (final salary) pension, or annuity income, compared to other savings you might have.
Compare this with how long you think you might live in retirement. Although we can talk about average life expectancies, keep in mind a man aged 65 today has a 50% chance of living until 89, and a 25% chance of living to 95. A woman the same age has a 50% chance of living till 93, and a 25% chance of living till 97.
You ideally need to fix an income that covers your likely expenditure for your retirement. That then really does give you the freedom with any savings or pension left.
5. Seek expert help
Speak to Pension Wise, the free Government service set up to help you and answer questions you might have. Go to pensionwise.gov.uk or call 0800 138 3944.
It will help to have done your homework and have all your paperwork to hand when you book an appointment.
And find a professional adviser who can help you navigate the complexities and choices available to you.
This might not be as expensive as you think, and might well prove invaluable. Visit unbiased.co.uk to find someone in your area.
6. Do nothing
The age of 55 is not a deadline – it is simply the earliest age the Government has said you can get access to your pension.
This doesn’t necessarily mean you need to do anything if you were not originally planning to.
However, it might be worthwhile reviewing your pensions and other savings to see if they can work a bit harder for you before you retire.